Oil Bonds

By : Neha Dhyani

Updated : Apr 20, 2022, 11:23

Oil Marketing Companies were issued Oil Bonds from 2005 to 2010 by the government to compensate for the losses incurred, during the soaring oil prices, to protect consumers from soaring oil prices. These bonds are less liquid than other government securities because they are not eligible as statutory current ratio securities.

Why are Oil Bonds in the news?

Nirmala Sitharaman, the Finance Minister said on August 16, 2021, that the government is paying off the oil sales company (OMC) for Oil Bonds issued by the UPA government of Manmohan Singh. On March 31, 2021, she said the principal balance of these Oil Bonds was Rs 1.31 trillion and the interest was Rs 37,340.

The reason these bonds were issued by India, was when the government fixed fuel prices to protect customers from price shocks. These were issued to OMC instead of cash and at that time the gasoline and diesel prices are fixed by the government.

Historically, oil refineries and marketing companies have technically sold gasoline and diesel to retailers at a loss when crude oil prices were high. However, the government compensated by issuing long-term bonds that oil companies could repay later.

High oil prices and the recession in 2008 put pressure on the government. By raising capital through borrowing, these payments can be deferred without causing a significant price increase. These bonds are promissory notes for deferred subsidies paid by the government to OMCs. The government did not subsidise these companies, so these payments did not appear in the budget document until the principal or interest components were repaid.

Therefore, these non-budget items did not appear in the budget deficit figures in the annual budget and were only included if these bonds were repaid a few years after they were issued.

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Deregulation of Oil Bonds prices

It was announced that the first kind of deregulation would take place in 2010, Oil Bonds will be phased out and OMCs were to be paid in cash. In June 2010, gasoline prices were deregulated to reflect the market price of crude oil. The government announced diesel prices in October 2014. In June 2017, India introduced a dynamic fuel pricing system with daily fluctuations in gasoline and diesel retail prices.

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Effects of Oil Bonds prices

The liberalisation of fuel prices is gradual, with the government liberalising turbine fuel prices for aircraft in 2002, gasoline in 2010, and diesel in 2014. Before that, the government intervened to set prices for retailers to sell diesel or gasoline. As a result, the income of oil distributors that the government had to compensate for was lost.

Prices have been deregulated, tied to the market, freed from government subsidies, and allowed consumers to profit from lower prices when global oil prices fall.

Deregulation of oil prices was intended to be fixed at global oil prices, but Indian consumers as both central and state governments impose new taxes and surcharges to generate additional income.

This requires consumers to pay the amount they have already paid or more. Price sharing gives fuel traders such as Indian Oil, HPCL, and BPCL the freedom to set prices based on their own cost and profit calculations. However, the main beneficiaries of this price liberalisation policy reform are the government.

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FAQs on Oil Bonds

Q.1. What is the total amount of unpaid Oil Bonds?

The government has paid interest on Oil Bonds of Rs 70,195.72 crores for the past seven years. Out of the Rs.1.34 lakh crore Oil Bonds, the principal of Rs.3,500 crore will be paid and the remaining Rs.1.3 lakh crores will be repaid by 2025-2026.

Q.2. Can you blame Oil Bonds for the soaring fuel prices?

The revised NDA government led by PM Modi has blamed these currently unsuccessful Oil Bonds for the centre's inability to reduce taxes and lower gasoline and diesel prices. The government would have to repay Rs 100 billion in the current fiscal year, Rs 315 billion in 2023-2024, Rs 528 billion in 2024-2025, and Rs 369 billion in 2025-2026.

On a cumulative basis, this is much less than what the government collects from the central sales tax on petroleum products only.

Q.3. With regards to Oil Bonds, did Covid19 raise taxes on fuel?

Yes. During the first wave of COVID, the centre had levied Rs. 13/litre on diesel and Rs. 10/litre on petrol. Excise duty was also raised by Rs 2-12/litre for petrol and Rs 5-9/litre on diesel. According to a government statement, the Road taxes on gasoline and diesel have also been raised by 8 rupees per litre to 18 rupees per litre, With regards to Oil Bonds.

Q.4. Keeping Oil Bonds in mind, how have petrol and diesel prices suddenly risen in so many states of India?

Keeping Oil Bonds in mind, Many states have levied additional VAT to increase sales to direct their revenues. On May 5, the Delhi Government last year lay the VAT on gasoline and diesel to 30 per cent of the existing 27 per cent and 16.75 per cent. The Tamil Nadu government has increased VAT on gasoline and diesel, resulting in a price hike of Rs 3.25 litres of gasoline and Rs 2.50 litres of diesel. Haryana raised its gasoline VAT by 1 rupee per litre and diesel VAT by 1.1 rupees per litre last week.